06/19/2017

Are Nasty Surprises Hiding in Your Balance Sheet?

Do you know what kind of nasty surprises are hiding in your balance sheet?

When was the last time your balance sheet got a good scrubbing?

Here’s a little accounting secret that few entrepreneurs or CEOs truly understand. Financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) are full of estimates and assumptions.

And the balance sheet is where most of those estimates accumulate (and eventually rot and die).

Here is a quote from a public company’s audited financial statements (in this case it is Chuy’s Holdings, Inc.). You will find a similar note in every set of audited financial statements you read.

Accounting Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ from estimates.

I added the yellow highlighting to make that the point that even “actual” financial results include “estimates and assumptions”.

And the sentence that says, “Actual results could differ from estimates” would be more accurately stated as, “Actual results WILL differ from estimates.”

From the timing and amount of revenues recorded, the timing and amount of expenses recorded, the collectability of receivables, the value of inventory, the value of intangible assets, and a host of other amounts on the financial statements.

It requires the time and attention of someone who understands financial statements to ensure those estimates don’t accumulate (and eventually rot and die) on your balance sheet.

The accounts on your balance sheet need to be monitored, evaluated, supported and documented every month to make sure they are as accurate as possible.

Cleanliness is Next to Godliness

Now is a great time to sit down with your CFO, Controller, or outside CPA and have them walk you through your balance sheet.

Have them show you at a summary level what makes up each of the balances. Have them show you that your balance sheet is super clean (hopefully it is) and that there are no nasty surprises or dirty diapers lying around in there.

You seldom walk into a really nice home only to find a dirty, messy, disorganized interior once you walk in.

Let’s hope your business (and your balance sheet) is at least as nice and clean as your home. 😊

A Quick Start Guide to Financial Forecasting: Discover the Secret to Driving Growth, Profitability, and Cash Flow Higher provides a straightforward, easy-to-understand guide to one of the most powerful financial tools in business: a reliable financial forecast. It will transform the financial future of your company and help you make better, faster, smarter business decisions. Order the book at Amazon.